Business models

Sujith Nair
Research Group on Competitive Strategy and Business Models
Department of Industrial Organization and Business Administration,
Technical University of Madrid

The business model

Who is the customer and what does the costumer value?

and
What is the underlying economic logic that explains how we can deliver value
to customers at an appropriate cost?

Effective business models operationalize good strategies -- turning position

and fit into wealth.

Business Model refers to the logic of the firm, the way it operates and how it
creates value for its stakeholders;
whereas
Strategy refers to the choice of business model through which the firm will
compete in the marketplace.

The business model- Significance for start-ups

Startups are not about executing plans where the product,
customers, channel are known.
Startups are in fact only temporary organizations, organized to
searchnot executefor a scalable and repeatable business model.
Instead of business plans the concentration should be on customer
development, innovative and agile development and business
models should be the focus.

parts of the business model

Business models are made of concrete choices and the consequences of these
choices .
Choices (compensation practices, procurement contracts, location of facilities,
assets employed, extent of vertical integration, and sales and marketing
initiatives)
Different designs have different specific logics of operation and create
different value for their stakeholders.

Three types of choices: policies, assets and governance structures.

Policy choices refer to courses of action that the firm adopts for all aspects of
its operation.
Asset choices refer to decisions about tangible resources.
Governance choices refer to the structure of contractual arrangements that
confer decision rights over policies or assets.

Some distinctive features of Ryanairs business model

Choice

Consequence

Secondary airports

Low airport fees

Lowest ticket prices

Large volume

Low commissions to travel agents

Low cost

Standardized fleet of 737s

Bargaining power with suppliers

Single-class

Economies of scale

High-powered incentives

Attracts combative team

No meals

Faster turnaround

Nothing free

Additional revenue

Spartan headquarters

Low fixed cost

No unions

Flexibility in rostering staff

Ryanair simplified business model representation

The Sixteen Business Model Archetypes

Malone TW, Weill P, Lai R, D'Urso VT, Herman G, Apel TG, Woerner S. 2006. Do Some Business Models Perform Better than
Others? A Study of the 1000 Largest US Firms, MIT Sloan School Working Paper 4615-06. MIT SeeIt Project: Cambridge, MA

New services that also create new business models/value

Industry sector

New service/new business model/value

Ebay

On-line auction

A new way of buying and selling through a

community of individual users

Ryanair

Airline

A new way of consuming air-travel with no frills

service and emphasis on economy.

Amazon

Retailer

New way to buy goods- on-line retailer

Napster; iTunes

Music retailer

New way to buy and download music.

Google

Internet search
engine

A fast way to search for information on the internet

Partygaming

On-line gambling

Gambling and gaming from the comfort of your

own home

Myspace/
Facebook

Social networking

A community of users on-line who can chat and

share music, images, news from their own home.

You-Tube

On-line video and

film archive

A community of users sharing home made video

clips plus recorded favourite clips from movies.

Company

The building blocks of a business model

(Osterwalder and Pigneur [2004])

CUSTOMER SEGMENTS

which customers and users are you serving?

which jobs do they really want to get done?

VALUE PROPOSITIONS

what are you offering them? what is that

getting done for them? do they care?

CHANNELS

how does each customer segment want to be reached?

through which interaction points?

CUSTOMER RELATIONSHIPS

what relationships are you establishing with each segment?

personal? automated? acquisitive? retentive?

REVENUE STREAMS

what are customers really willing to pay for? how?

are you generating transactional or recurring revenues?

KEY RESOURCES

which resources underpin your business model? which

assets are essential?

KEY ACTIVITIES

which activities do you need to perform well in your

business model? what is crucial?
16

KEY PARTNERS

which partners and suppliers leverage your model?

who do you need to rely on?

COST STRUCTURE

what is the resulting cost structure?

which key elements drive your costs?

key
activities

value
proposition

customer
relationships

key
partners

customer
segments

cost
structure

revenue
streams

key
resources

channels
19

Activities

Form groups of 4.
Identify the business model of two firms from the same
industry.
Compare the business models critically with the
Osterwalder model.
Make a presentation of 15 minutes. (8 Oct, 10 Oct)